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A New Mandate: Moving Corporate Real Estate From Non-Core To Core focus

Turning Corporate Real Estate into a Strategic Resource

25Jul
Strategic management of Corporate Real Estate is a complex cross-functional, multi-disciplinary activity requiring strong leadership and the ability to understand the wider dynamics of change


How Corporate Real Estate affects business performance

Most companies have to manage a complex range of real estate assets, owned or leased, to carry out their business activities. In addition, direct or indirect allocation to real estate assets can be a significant portion of a company’s overall investment portfolio. Companies can invest in real estate to diversify risk, generate un-correlated (to stock markets) long-term returns, preserve capital (or create capital reserve) or try to secure some additional income and capital gain. As a consequence, Corporate Real Estate (CRE) represents, for some companies, a very substantial item on their Balance Sheet or P&L.

CRE can also affect the performance of a business both directly - because of its impact on operating costs, capital expenditures and its ability to generate revenues - and indirectly, because of its influence on company image, staff motivation and creativity and, in general terms, business productivity.

A well-understood complication is that real estate is 'static', poorly 'flexible' and not 'liquid', by nature, and can severely limit the 'agility' of a company preventing the timely and economic execution of organizational changes and new business strategies. Standard building shells for office or logistics space, in mature markets, offer relatively high flexibility and potential for disposal or re-use.Some industries such as Pharma and Biotech, however, have highly specialized CRE, designed and built to meet customized technical specifications and regulatory requirements. These buildings can be expensive to construct, decommission and re-purpose and are difficult to sell or lease. These highly specialized assets can quickly become functionally obsolete, generate impairment losses in a company’s Balance Sheet and become a 'liability' for the business rather than a resource.

Another potential source of complexity and inflexibility generated by CRE can arise from environmental liabilities and negative impacts on local communities, which can erode brand equity and represent a barrier to re-purpose or disposal because of the cost and time involved in obtaining permissions from Authorities and carrying out remediation works.

Building in leadership and multi-disciplinarity to navigate through change and manage complexities

When we put CRE into the context of the wider business picture, we realize that continuous developments in most industries, mergers, and acquisitions, rapid changes in the definition of competitive arenas, disrupting innovations and agile new entrants have become the new normal and force an alternative, dynamic attitude to thinking about CRE.

Effective and up-to-date CRE management requires a proactive, strategic and multidisciplinary approach, which combines technical, environmental, commercial, financial, legal and tax competencies with business intelligence, creativity, and understanding of the wider dynamics of change, very often across geographies and cultures.

Furthermore, being a cross-functional, cross-divisional activity, working across hierarchical reporting lines, effective CRE management also requires strong leadership. CRE executives must have the ability to mobilize internal and external resources and stakeholders and generate consensus, sometimes without having the possibility to leverage contractual or authoritative power.

A new mandate: Moving Corporate Real Estate from non-core, to core focus

Despite its complexity and potential to affect the performance of a company, CRE management has been generally regarded as a non-core, secondary activity.

Very often, in-house CRE functions operate with limited intelligence, in terms of availability, completeness and reliability of data, and the support of local external advisors and suppliers.Their mandate is usually focused on efficient day-to-day operation of the facilities, with little focus on long-term strategic management.

Important decisions on major investments, leases, acquisitions, and sales, or new developments, are often taken at the highest levels in organizations as one-off, discrete projects and deals.

The lack of on-going 'C-level' strategic management of CRE, as an integral part of the overall strategy of a company, can turn CRE from a potential resource into a barrier to growth, productivity, and competitiveness.

Strong leadership, ability to navigate the wider dynamics of change and continuous alignment with business objectives can transform CRE from an operating necessity into a resource and contribute to improving companies’ profitability and agility.

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